CPI Card Group Inc. Q1 FY2025 earnings call

• Announced acquisition of Arroweye Solutions, a provider of digitally-driven on-demand payment card solutions for the US market, which fits in with strategies to gain share and diversify business. - First quarter sales performance led by debit, credit, and prepaid, both up 10%. - Adjusted EBITDA declined 8% in the first quarter due to mix issues and production costs. - Affirmed 2025 organic outlook for mid-to-high single digit growth in net sales and adjusted EBITDA. - Focus on driving sales growth while balancing long-term investments and managing spending to improve margins. - Arroweye's technology-driven platform eliminates inventory needs, allows hyper-personalization, and has low-double-digit adjusted EBITDA margins currently, with potential for margins to move closer to CPI levels over time.

In the first quarter, both debit and credit and prepaid segments increased 10% in sales. Debit and credit growth was led by contactless cards including eco-focused cards, with personalization services declining. Prepaid growth was driven by higher value fraud prevention packaging solutions in healthcare. Income from operations for the debit and credit segment decreased 5% in the first quarter due to lower gross margins and increased operating expenses. The prepaid debit segment income from operations decreased 9% as benefits from sales growth were offset by lower gross margins impacted by sales mix.

• Affirmed 2025 organic net sales and adjusted EBITDA outlook for mid-to-high single digit growth, with Arroweye acquisition's contribution not included. - Expected free cash flow to be lower in 2025 due to Arroweye integration, inventory purchases, and tariff impacts. - Net leverage ratio impacted by acquisition, expected to improve in 2026. - Earnings per share from Arroweye expected to be dilutive in 2025-2026, then accretive in 2027. - Anticipate utilizing around $5 million of Arroweye’s net operating loss tax benefits in coming years.

• Uncertainty in the US economic outlook which could affect issuances and customer purchases. - Potential additional tariff issues impacting costs. - Mix impacts and production costs affecting gross margins. - Transition and integration costs related to the Arroweye acquisition impacting financial results in the short term.

Q: Pete Heckmann asked about Arroweye's customer base and margin expectations.

A: John Lowe explained Arroweye serves nimble card programs like fintechs wanting to test small, nimble card programs, with low-double-digit adjusted EBITDA margins currently, and Jeff Hochstadt added that CPI's purchasing power will help bring Arroweye's margins closer to CPI levels over time.

Q: Jacob Stephan asked about balance sheet moves for the acquisition.

A: Jeff Hochstadt said they ended the quarter with over $30 million in cash and drew about $35 million from the revolver to finance the Arroweye acquisition.

Q: Craig Irwin asked about pricing, Indiana startup costs.

A: Jeff Hochstadt discussed margin pressures due to sales mix and production costs, SG&A actions to offset margin decline, and John Lowe mentioned Indiana transition costs tapering over time as the new facility comes online while still running both facilities for a period to not lose customer steps.